Notes From Underground: The Government Shutdown, Or Lots of Media Drama

While I was off visiting my children and grandchildren, the government took its own hiatus. However, while I am back at it, the government is still shuttered (partially, at least). For years the pundits have ranted about the negative effects on the economy (and some even singled out the markets). For all of the noise, the bond market is stable and stocks have rallied 8 percent since the shutdown began on December 22.

The pain to government employees has been real but the overall impact on the financial system is minimal, to say the least. As Paul Simon might sing, “Shut downs come and shut downs go.” It was interesting to hear that thousands of IRS employees are going back to work with no immediate remuneration to ensure that tax refunds are disbursed. I deplore the IRS workers taking this path for if they were firm in not returning to work Congress and the White House would actually have to act to resolve the stalemate. The IRS workers have real negotiating power. And now with TAX SEASON upon us the experienced workers are not easily replaced.

The massive government deficits dictate that the U.S. government needs revenue. Yes, I am aware that the Treasury Department has many tools in which to fund the government in the near term but a TRILLION DOLLAR deficit requires revenue. From an economic standpoint, many consumers are in need of their refunds in order to maintain current levels of consumption. The IRS employees ought to unite and force an end to insanity. Shame on all who engage in political posturing for the sake of self-aggrandizement. It’s a sad day when I root for the IRS.

There were some other important pieces of news while I was on vacation:
First, Annegret Kramp-Karrenbauer, the new leader of Germany’s CDU party (affectionately known as AKK), put forward the idea for a GERMAN TAX CUT. This has been an idea discussed in NOTES FROM UNDERGROUND for a few years as Germany is the one country in Europe that has the budgetary capacity to promote a fiscal stimulus. The German economy has begun to slow as tariffs and slower Chinese growth have negatively impacted the dynamic German export machine. If the Germans pass a tax cut I would want to be long the DAX and short the U.S. equity markets on a relative value play. The technicals are not great but if you do your work you can use the EWG ETF as a proxy for German stocks. Two years ago I promoted the EWG as a play on the strength of Germany relative to the rest of Europe. The EWG is back to those same levels of 2016 so the risk is very discernible.
The ECB is no longer adding liquidity but interest rates on the GERMAN two-year note -62 BASIS POINTS while the 10-year BUND is yielding 22 BASIS POINTS. There are not many alternatives for German investors especially as the domestic real estate market has been very buoyant. The risk to the DAX is that President Trump moves ahead with 25 percent tariffs on European autos. AKK has made a statement and it bears watching to see how it unfolds.
Secondly, there were two FED speakers that provided a dovish tilt in support of Chair Powell’s recent volte face on the FED balance sheet (shrinking may no longer be auto-pilot). Esther George, the FED‘s perma-hawk, said Tuesday, “It might be a good time to pause our interest rate normalization, study the incoming evidence and data,and verify our location. It is possible that some additional rate increases will be appropriate. But making that judgment is not urgent.”
As Peter Boockvar pointed out in a piece he wrote titled, “Esther George Is Someone to Listen to,” she is a respected hawk and, this year, a voting member of the FOMC. President George also raises some concerns over the impact of the shrinking of the balance and its impact. Take that, Simon Potter.
Also, on January 10, Vice Chairman Richard Clarida delivered a speech about titled, “Monetary Policy Outlook for 2019,” in which he took a very dovish stance. Clarida walked back Powell’s balance sheet reduction statement from the December FOMC meeting when he said: “If we find that the ongoing program of balance sheet normalization or any other aspect of normalization no longer promotes the achievement of our dual-mandate goals, we will not hesitate to make changes.”
Also, Clarida raises concern about the CROSSWINDS developing from slowing growth and tightening financial conditions in global economic developments.
It is refreshing to hear an FOMC Governor raise the issue of the global macro environment as a reason to be cautious going forward. Richard Clarida is no mere academic as he worked in the private sector as a global strategic advisor for PIMCO. The FOMC needs to be more forthcoming in its global views as it has a third mandate because of the role of the U.S. DOLLAR as the world’s reserve currency. It is Clarida’s sense that the world economy is slowing, allowing the FED to be patient. The FOMC statement and minutes has typically used the word HEADWIND when discussing concerns about macro conditions.
Does Clarida’s use of CROSSWINDS imply something not as powerful? I’m not sure, but the FED‘s new patience has certainly supported the rally in the equity markets and also prompted a rally in the emerging market currencies, which have helped loosen global financial conditions. As a result, the yield curves — particularly the 5/30 — has steepened, touching 56 basis points on Tuesday, a level unseen since February 2018. (It has since flattened.) I will continue discussing more investment outlooks along with concerns are global risk areas. No more shutdown for Notes From Underground.

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13 Responses to “Notes From Underground: The Government Shutdown, Or Lots of Media Drama”

  1. Tader 1 Says:


    In the past you commented about German citizens never being asked if they want to fund the “bailout” of other indebted EU member countries.

    If the British govt fails to exit the EU/Brussels Control even after a Yes vote for Brexit, why would the German citizens wishes ever be taken into account?

    What I’m trying to ask is does Germany still have enough power left to get the final say in Brussels ?? Or must Brussels have the balance sheet of Germnay to keep this EU thing going??

    (Thanks for DAX commentary. I’ve been thinking other countries could be looking at Tax Cuts to not be outdone by Trump)

  2. Joseph Says:

    The longer the ‘government’ remains shut down the better. Republicans used to call for smaller govt.. Well, now we have it, if only for a short time. With any luck, maybe it will be shut down long enough for some of the useless eaters to to throw in the towel and leave to get a new job. There is too much dead weight in govt. and the shutdown exposes this fact. Let em’ whine and quit. Good riddance.

    • David Richards Says:

      Civil servants almost never quit a job except to retire on a cushy, indexed pension with generous benefits. Plus I’ve read repeatedly that in the end they’ll be given back-pay for their time off while not working. If so, then in the end it’s like extra vacation for nothing.

      • the bigman Says:

        Joseph The problem is that these workers would have to take significant cuts in pay and bemefits to leave the public sector According to CBO report for fiscal 2016 govt workers with only a high school degree (read TSA screener) make 34% more in salary and have benefits 94% greater than similar workers in the private sector. For those with bachelor degrees the numbers are 5% and 52%. Total compensation for high school degree workers is 53% higher compared to similar private sector workers and 21% higher for those with a bachelor’s degree. So put away the Kleenex and cancel the bake sale these folks are doing quite well for their skill level

      • David Richards Says:

        Yes bigman, and in addition the gov’t workers have AAA job security. In the real world, you accept a lower return for higher safety. But not in the public sector. An overpaid, bloated public sector & military with rich pensions was also a major factor in the collapse and fall of Rome. To help “pay” for it they minted increasingly more coins containing ever less silver which eventually became worthless. So maybe it’s actually more like 450 AD now than 1937 as Ray Dalio says?

    • Nate Says:


      Unfortunately, this is not really the case (the government is hardly shut down and you are hardly saving money as a taxpayer). Not to get too political, I originally wanted the shutdown, now it is a total joke. I am a federal employee and I am considered excepted (basically essential). However, on January 16, 2019 there was a bipartisan bill signed into law called the “Government Employee Fair Treatment Act” stated that ALL furloughed employees will get back pay. Essential employees who are working are now allowed to take leave.

      Here is the joke: if you are going to get paid, WHY ARE YOU NOT ALLOWED/FORCED TO WORK???? And if you are NON ESSENTIAL, why are you getting a raise and better benefits over those that are essential and WORKING????

      If you are NON ESSENTIAL, you just got one heck of a pay raise. If you are essential, like me, tough. I have to spend time commuting, spend gas, spend tolls, and when I take leave they CHARGE me from my leave balance. If I were non-essential, I would get all of that for free (not to mention child care some have to pay). Also, in theory, a non essential can get a temp job that pays, I cannot. I rely on my wife and the reserves (part time) to help offset not getting a paycheck.

      BTW, the federal retirement is not exactly cushy (depending on when you got hired). I have to pay 4.4% of my income for the same retirement benefits that most of my office only have to pay .8%. I’m not complaining about retirement, nor my job. I am VERY fortunate to have the position I do and very fortunate to have wonderwoman as a wife. But these are life choices.

      The “Government Employee Fair Treatment Act” is anything but fair. If you are non-essential, your are treated like lottery winners, whereas if you are essential and actually “needed”, you are treated as a slave, literally, temporarily… if I were a non-federal employee tax payer I would ask my masters in congress why I am paying for yet more people to not work. And yes, I have contacted my Senator who is seemingly useless.

  3. Pierre Chapuis Says:

    The question I ask is: How much work will these IRS workers actually get accomplished? I know if I was going back to work and not getting paid there would be a lot of piddling around.

    • yraharris Says:

      Pierre—maybe we should ask the yellow vests.I agree with your premise but I would not go—it is unethical to not pay someone for their labor.

  4. David Richards Says:

    Despite a perfect storm of relative advantages for the dollar (rising interest rates, corporate funds repatriation, the so-called QT, Europe in political chaos and early recession, Asian slowdown, and the temporary US economic spike (now major downturn) in response to the massive debt-funded tax break and outperforming markets until 3Q2018), the US dollar has gone nowhere and in fact might be completing a dangerous looking multi-year head-and-shoulders formation, with the last shoulder having topped at a significant Fibonacci retracement point.

    Well, what won’t go up (i.e., the dollar) will instead go down.

    And so we are now seeing early and persistent signs of accelerating food inflation around the world. Nothing fans the flames of civil unrest like rising food prices. Maybe be on watch for a possible hot, bloody summer or two. The unintended consequence of policymakers. Turning the page back to dovish monetary policy and looser financial conditions, like appears to be the new direction in both the east and west, could unleash the food inflation monster and worse riots globally than just the mild yellow jackets so far.

    The global middle class, lower class and most workers do not and have not benefited from years of global QE and asset price inflation. Instead they’re feeling screwed and might be rolling out Mr Guillotine in response, at last.

    • David Richards Says:

      ^ plus ill-conceived tariffs aggravate food price inflation and civil unrest globally. Unintended consequences.

  5. yraharris Says:

    From Yra—right on cue Sen.Grassley raises the issue of Trump pushing for 25% tariffs on autos produced in Europe in a quid proquo to open European ag markets to US farmers—the French have been notorious promoters of mechanisms to protect French farmers under the CAP—the Community Ag Programs

  6. GreenAB Says:

    As far as this German tax cut…

    The Grand Coalition (CDU/CSU + SPD) has a pact in place that will eliminate the “Solidaritätszuschlag” (a small tax added on income tax) for 90% of taxpayers. BUT: the process will start in 2021, it will be in steps and it will only relieve taxpayers of 9-10 billion (= pretty much nothing).

    AKK, Merkel, her CDU party and the sisyter party CSU as well all want that process to start ealier and for high incomes as well. But the SPD insists on what was negotiated in the coalition pact (2021).

    So – barring an unexpected surplus (highly unlikely given the cooling of the economy) or a full blown recession that needs a stimulus – you can pretty much forget about a tax cut, other than that was has already been agreed on.

    I would be very careful about going long German stocks. Manufacturing orders are flashing RED: -3% in October and -4.3% in November (year over year)! Order books are still filled but the weakness in new orders will translate into less output later this year. I´d wait for the trend to reverse.

    • yraharris Says:

      Green AB—as usual your comments are very vital to the discourse at NOTES–I believe they will bring it forward because as you note the German economy i slowing and couple this with the news out about Germany warning about Huawei’s involvement in German 5G roll out we will probably see the Chinese make some comment.Also of course Trump has it in for Merkel because of the G7 meeting so it is time for Angie to say goodbye–it is also why the German BDI is warning about a no deal Brexit–but the Dax was a very poor performer relative to the US over the last 18 months—and again Draghi has trapped himself by maintaining negative interest rates where is a German investor to put her money

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